There is very little inventory available as far as multifamily goes in Northern Nevada. That, and rising rents along with serious demand for housing is positioning the Reno-Sparks area as a top destination for investment dollars. Multiple offers never cease to arrive even with very few deals taking place, says Ken Blomsterberg, managing director of Marcus & Millichap’s national multifamily housing group.
The numbers don’t lie and Reno-Sparks is showcasing a persistent rise in rents and lower vacancy rates than ever before, which is luring the gaze of investors, particularly those looking to enter a 1031-exchange. Real Estate firm Johnson Griffin, responsible for tracking 25,000 apartment doors across 11 submarkets in the zone reports that vacancy dipped to 1.63% in Q2 2021, while rents were at unprecedented highs for all property types, not just multifamily.
The average overall rent for Q2 of this year, for a 1-Bed/1-Bath apartment was $1,607, which is actually 9.4% more than Q1, and 17.4% more year-over-year.
“The influx of population growth and job creation, especially in higher-paying jobs, pulls the entire market up. That not only affects class A but the B and C properties as well. You are going to see strong rent growth as long as the vacancy rate holds strong, and it has been.”
Investors are looking to deploy equity into value-add deals, or B and C class properties where they can increase value through a variety of ways. Blomsterberg believes that the sweet spot right now for investors is not what you would think.
“Normally they would be looking for (large) stabilized newer properties. Now they are looking for deals in that 50- to 100-unit range. Investors are broadening their scope, and Reno is definitely a market where they are zeroed in.”
Multifamily owners want to go to Reno but because of a lack of inventory, it’s very difficult to convince an owner on a 1031 exchange without first identifying the upleg. Well, like previously stated, owners who are already in Reno are just not selling because they want to stay in Reno, and finding an upleg there is not that easy these days.
“Buyers who have assets that have seen significant appreciation over holding time might be motivated to sell, but they are wary of paying capital gains taxes on the sale of commercial investment properties. Investors can defer gains by completing a 1031 exchange for a similar property, but there just aren’t any suitable replacement assets to be found”
Reno is starting to see more development including luxury apartments already set to accept tenant applications, and others coming online soon. Luxury development means higher costs for residents which experts believe will be offset by the influx of high-paying jobs.
Reno-Sparks became the ideal place to invest in multifamily stemming from migration patters and displaced people moving away from larger markets and into smaller ones. In particular, high income earners from the Bay Area who made their way inland as remote work skyrocketed, and office-use diminished. The Nevada State Apartment Association had already accepted the fact that the city would go through 18-months of oversupply, but the pandemic changed that.
Now with so much uncertainty in the office sector, and still lower rents than in the Bay Area, residents of Reno-Sparks, regardless of where they are from, want to remain in the area.
The 1031-Exchange will be on the chopping block come Dec. 31, when Biden’s Tax Plan takes effect and the tax-code becomes greatly altered with a $500,000 cap on deferred gains, and essentially doubling the capital gains tax—among other things such as eliminated stepped-up basis. 155 days remain until the end of the year, which means investors still have the opportunity to complete a like-kind exchange under the current 100-year-old provision.